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Tech giants face UK tax overhaul as Treasury says they must pay more

Tim Wallace
Big tech companies could be taxed on their revenues as well as their profits - Bloomberg

Tech giants could face sweeping new taxes in the UK as the Treasury is considering taking a share of their revenues, with politicians claiming the current level of payments to the Exchequer is not fair.

The radical proposal would break the principle of levying tax on profits which is designed to make sure taxes are paid in proportion to money earned, rather than turnover.

Officials grappling with the idea have even considered labelling the use of a search engine as "bartering" as web users exchange their data for the company's information – and so it could be subject to VAT, even though no money changes hands.

But tax experts said the plan risks imposing double taxation on tech companies if profits are taxed in one country and revenues in the UK – pushing them to invest less in Britain as a result.

"If we look at what they’re trying to say, it is that profits are being made here but they are not being taxed in the UK, it is being taxed elsewhere. So it is effectively a battle between governments over who gets the taxing rights," said Chris Sanger at EY.

"What they’re trying to do is overturn the current status quo, and that will lead to double taxation. We try to avoid that because it acts as a real deterrent for companies to invest in the country."

Mr Stride, pictured second from the right, said the tax may be the Government's preferred option to bring in funds from tech firms, raising the prospect of its announcement in next month's Spring Statement from the Chancellor, pictured in the middle of the lineup Credit: Yui Mok/PA

The OECD is coordinating an international effort to work out if and how to tax digital titans more, and is expected to publish a report in the coming months.

But if this process is too slow or unwieldy, or fails to reach a conclusion at all, the Treasury is considering acting unilaterally.

Mel Stride, the financial secretary to the Treasury, said the tax system was not designed to cope with multinational digital businesses, and a revenue levy was the "potentially preferred option".

“At the moment [they] are generating very significant value in the UK, typically through having a digital platform with lots of users interacting with that platform," he told the BBC.

"That is driving a lot of value, so you're looking at social media platforms, online marketplaces, internet search engines, where at the moment the tax regime is not taxing those activities fairly.

"We want to move to a situation where we are taxing those activities fairly."

Firmer plans could be announced in next month’s Spring Statement, when the Chancellor updates Parliament on the state of the economy and his tax and spending plans.

This would not be the first attempt to raise more cash from the companies.

Google and Facebook, which have historically shifted sales to their bases in Ireland, have both started to pay more tax in the UK after George Osborne’s “diverted profits tax”, a levy on companies moving revenues offshore.

This is currently raising in the region of £200m to £300m per year, a sum which has been deemed insufficient by officials, hence their search for an additional levy.

Social media companies are also in the firing line Credit: Jeff Chiu/AP

Two years ago Facebook began to recognise more of its revenues in the UK, which led to its bill to the Exchequer increasing last year. Google paid £36.4m in tax in 2016, the most recent set of figures, an increase on previous years after a six-year inquiry into the company’s affairs by HMRC.

The companies have insisted they pay all the tax they owe, but have continued to face accusations that they are not paying their fair share. Google, Amazon and Facebook have pointed to increasing levels of investment in the UK, including promises to hire thousands of new staff, as evidence of them helping the economy.

The companies did not comment but one tech industry source cautioned against the UK introducing its own measures, warning that other countries could retaliate in a way that would harm British businesses overseas.

A range of practical difficulties are in the way, too, including how to define which companies should face the tax, as many more "conventional" companies also have large online business operations.

The Treasury has indicated this change will target only social media firms, online marketplaces, search engines and other companies which derive significant value from customer data, obtained through "free" services.

Another challenge is that taxing revenues makes life difficult for companies which are loss-making, because they have no profits from which to pay HM Revenue and Customs.

Sometimes this is because companies are investing heavily – government sources indicate startup firms could be exempt from the revenue tax, in an effort to avoid stifling their investment and expansion.

Years of Founding Social Media

This too could be difficult to define, however. Amazon made little by way of profit until recent years, and tech unicorns such as Snap are fast-growing startups worth tens of billions of dollars but are not close to turning a profit.

The entire digital industry is very new in historical terms so a threshold would need to be set to decide what does and does not qualify.

Crossing borders to tax revenues may also be legally problematic if a company from the US or China sells adverts from a third country based on data gained from UK web users.

News of a potential tax change follows the publication of a position paper alongside the Budget in November.

“The Government believes in the principle that a multinational group’s profits should be taxed in the countries in which it generates value,” the paper said – which may mean where customers use the digital companies’ services, not where the websites are based or designed, which is where businesses often argue the value is generated.

“Pending reform of the international framework, the Government will explore interim options to raise revenue from digital businesses that generate value from UK users, such as a tax on revenues that these businesses derive from the UK market,” the paper said.

“The UK will work with other countries to consider how such a tax could be targeted, designed and co-ordinated to minimise business burdens and distortion. However, the Government stands ready to take unilateral action in the absence of sufficient progress on multilateral solutions.”

At the time tax experts warned unilateral action could attract extra taxes on UK firms operating abroad.

"Any moves made by the UK are likely to be mirrored by other countries, so UK digital businesses operating overseas will be equally affected," said Alison Lobb, international tax partner at Deloitte.

She also warned the levy could deter cross-border trade in a highly global industry.